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One lesser-known indicator that can potentially be used to confirm trends and identify reversals is “on-balance volume,” or OBV. If you can figure out how to use on-balance volume to your benefit, it can be a valuable tool at your disposal. Let’s get right into the intricacies of the indicator.

OBV explained

On-balance volume is one of the market indicators you can use to make predictions on where to make your next move in the stock market.

If you’re looking for trend confirmation, look for the OBV to follow the overall price trend. It’s an indicator that leverages the idea that changes in volume often foreshadow changes in price. When looking at this indicator for this purpose, focus primarily on the changes of the OBV’s trends, as well as price. If you’re looking for a change in trend rather than a confirmation, you want to see the OBV and price trend in opposite directions. When this occurs, it can signal a reversal.

On-balance volumes are generally plotted on a price chart, but don’t let it fool you — the OBV’s value on the chart, though still important, is not as important as the overall trend it represents. It’s used simply to get an idea of what to expect from a market and so that you might predict whether to expect a bull or a bear in the future. On-balance volume interpretation is in the eye of the beholder. But an effective OBV trading strategy can make a smart trader’s year if used correctly.

Now that we’ve got an idea of how to use this indicator, let’s take a look at an example.

OBV in the charts

Here’s a daily chart on the PowerShares QQQ Trust, Series 1 (QQQ):

Source: TradingView

If you look at the chart above, the 50-day simple moving average is plotted, and a support uptrend line is drawn. Below the price chart, you’ll notice the OBV indicator. Now, both the OBV and price were trending higher over this period, indicating a confirmation of trend up until the OBV broke below its lower uptrend line.

Once the OBV broke below that support trend line, it was an indication that there was a bearish divergence, and there could be a reversal in trend.

Here’s what happened after the bearish divergence:

Source: TradingView

Notice how there was a reversal in trend in the OBV, and thereafter, the price broke below its 50-day simple moving average and uptrend line.

The bottom line

Changes in volume often precede changes in price, and the OBV can be used to determine potential changes in price trends, as well as to confirm a trend. Do your homework, perform further research if you need to, and practice looking for these trends and changes, keeping in mind that no indicator works 100 percent of the time. With this knowledge, you will add an effective piece to your toolkit for swing trades.

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Keith Kern has been a full-time day-trader for 17 years; he moderates the Lightning Alerts chatroom at BiotechBreakouts.com.

Author:Keith Kern

The set-up: The Standard & Poor’s 500 gave a bearish hammer candle on Tuesday, which sets up a good risk-reward short-term type of trade for today, especially combined with the Relative Strength Index, which is showing some bearish divergence with the index.

The chart: Here’s how it all looks with the SPDR S&P 500 ETF (SPY)

The 50-day moving average hasn’t been tested for a while, and I think we get a fresh test on it now. I’m not calling for a huge crash or anything, just a short-term correction to that level.

The trade: You can short the SPY or I’d be comfortable using a leveraged inverse ETF like the Direxion Daily S&P 500 Bear 1X ETF (SPDN) or, for the more adventurous, the Direxion Daily S&P 500 Bear 3X (SPXS). Either way, I’d peg the trade to the SPY, since the ETFs are all based on it.

Set your stop at Tuesday’s high — $246.62 – and be ready to take profits as the SPY retests the 50-day moving average around $244.

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Keith Kern has been a full-time day-trader for 17 years; he moderates the Lightning Alerts chatroom at BiotechBreakouts.com. He does not trade in indexes or ETFs at all – focusing his day-trades on individual stocks – but analyzes the market from the top down looking for his daily trading ideas. While he sometimes trades stocks that are members of the S&P 500, he did not have any shares, options or open orders in any such stocks at the time this commentary was published.

Author:Keith Kern

Trading is unlike investing, because you’re not buying and holding stocks, looking for a steady rise in the price over time.

When you’re trading, you’re looking for a quick move, and a quick profit.

Typically, you have a specific time frame in mind, whether it’s within a matter of minutes or a month. That has every trader trying to figure out the best time to trade the market.

Truthfully, whether there is a best time (or not) actually depends on your strategy and the time you could dedicate trading the markets. Here are some tips, however, for finding the best time for you to trade, and to avoid trading.

Best timing to trade or avoid

If you’re a new trader looking to buy stocks, you might want to shy away from trading the open at first. At the open of the market, volume tends to be high, and there is a high degree of price volatility, which can make it hard for beginners. Let the dust settle, which can take 30 minutes to an hour.

Once you become a consistently profitable trader, you can look for some patterns that work for you at the open, and can use that analysis to trade in the day’s early moments.

Check out how the market can whipsaw in the first hour of trading. Here’s the five-minute chart of the SPDR S&P 500 ETF (SPY).

Source: TradingView.

For many new traders, the sweet spot might be for one to two hours after the open. At this point, prices tend to stabilize, and you can get an idea of the overall sentiment of the market. The price action is much slower, and the moves are a little more predictable.

Similar to the opening, volatility often picks up as closing nears. Again, it’s hard to pick a direction here, and the markets could whipsaw into the close. That in mind, if you’re new to trading, you might want to try to wrap up your trading day by 3 p.m. and avoid trading the final hour.

Final thoughts

The idea in trading is to be as comfortable as possible with the environment, and new day traders who want to control as many variables as possible will be cautious at the open and close. Move to those times as your trading proves successful, when you can define the best time to trade as any time you have a good idea in current market conditions.

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Keith Kern has been a full-time day-trader for 17 years; he moderates the Lightning Alerts chatroom at BiotechBreakouts.com.

Author:Keith Kern